A meeting of eurozone finance ministers meeting yesterday faced pressure to increase the size of a 750 billion euro (US$1,006 billion) safety net for crisis-hit members in order to halt contagion in the single currency bloc.
IMF managing director Dominique Strauss-Kahn was to call on the ministers to boost the facility and urge the European Central Bank (ECB) to step up its purchases of bonds to stem the crisis, an IMF report stated.
The IMF report and the situation on European debt markets were to be discussed at length, a eurozone source said, at the regular meeting of the so-called Eurogroup.
That will be followed by a meeting today of ministers from the broader 27-nation EU who are expected to formally approve an 85 billion euro aid package for Ireland and discuss the reform of EU budget rules.
Bond buying by the ECB helped calm markets at the end of last week, lowering the borrowing costs of countries like Portugal, Spain and Italy which have come under intense market pressure in recent weeks.
However, that may have been only a temporary respite for the 16-nation currency bloc, which some experts believe may not survive in its current form if the debt crisis rages on much longer.
Ewald Nowotny, a member of the ECB governing council, said on Austrian television that the eurozone economy had become so closely intertwined that splitting off peripheral states with debt problems would be counterproductive.
“Europe has already grown together so much than an amputation would have massive disadvantages for both sides,” he said.
Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti called for the issuance of joint European sovereign bonds — or “E-bonds” — to assert the “irreversibility of the euro.”
The pair, in a column published yesterday in the Financial Times, said the creation of a European debt agency that could issue such bonds would be possible as early as this month if the body that represents member states endorsed it.
The IMF report says a recovery in the eurozone, led by strong growth in its largest economy, Germany, could “easily be derailed” by renewed market turmoil and describes pressure on so-called peripheral euro countries as a “severe downside risk.”
The report argues that there is a “strong case” for boosting the size of the EU/IMF rescue facility and using the funds more flexibly, including to support banks.
However, Spanish Economy Minister Elena Salgado said increasing the size of the fund was “not the question for the moment.”
In an interview with French business daily Les Echos, she said Spanish economic fundamentals were sound and the country would not appeal for financial support from the aid mechanism.
The IMF paper also urges the ECB to expand its bond purchasing program until systemic uncertainties recede.
ECB President Jean-Claude Trichet said after a policy meeting of the central bank on Thursday that extraordinary measures to combat the crisis would remain in place, but did not signal any increase in the bond purchase program as some economists had predicted.
The bond buying is controversial within the bank’s governing council and influential Bundesbank President Axel Weber called earlier this year for it to be scrapped altogether.
The German government has resisted calls for an increase in the EU rescue facility, aware that German taxpayers would have to shoulder the biggest share of any additional bailouts, but Berlin could be forced to drop its objections if market pressures build this week.
Spain has taken aggressive action to ease investor concerns about its finances, announcing a series of measures last week, including plans to bring forward pension reforms, raise tobacco tax and cut wind power subsidies.
Portugal, widely seen as the next eurozone “domino” at risk of a bailout, has resisted any new measures on top of a tough budget for next year approved last month.
In a crucial week for the currency bloc, Ireland’s deeply unpopular government faces a parliamentary vote on its budget for next year. Although it is expected to pass, opposition parties have vowed to renegotiate the terms of the country’s bailout after an election early next year.
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